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Analysis of financial statement Industry: fertilizers of Pakistan Companies to analyze: Fauji Fertilizer Limited Engro fertilizers

Muhammad Tariq Gulam Mustafa Muhammad Shazli Visri Bha !a Ad a!i

Muhammad Ali Saeed


Analysis of financial statement

We ha e taken fertilizer sector to analyze their financial statements! "he financial statements and annual reports of FFC and E#$%& fertilizer for se en years ha e 'een taken for analysis! &ur analysis co ers follo(ing aspects of analysis: )! *ertical analysis +! ,orizontal analysis -! "rend analysis .! %atio analysis /! Conclusion and 0! %ecommendation

1. Vertical analysis
1sing comparati e financial statements to calculate dollar or percentage changes in a financial statement item from one period to the ne2t Balance sheet E#$%& Engro is le eraging through de't3financing! "he non3current lia'ility has 'een increasing since +44. to +4)4! Whereas5 common e6uity is relati ely declining as compared to de't!

FFC FFC has higher e6uity than its de't! In estment in FFC is relati ely secured 'ecause of its greater relying o er its o(n capital than non3current lia'ilities!

Income statement En ro "he ta2 payment rate is declining through +44. to +4)+5 from 78 of net sales to +8! Engro is succeeded in a ailing ta2 'enefit5 pro'a'ly due to its e2ternal financing! ,o(e er5 profita'ility of E#$%& is declining! #et profit declines from )-8 to 98 of sales! &ne possi'le reason is its increasing payment of interest from +8 to /8 of net sales to its lenders!

FFC has successfully reduced its production cost including financial cost! Its income has constant gro(th (ithin )-8 to ).8 of net sales! ,o(e er its income ta2 increases 'ecause of lesser financial cost!

!. "ori#ontal analysis BA$ANCE S"EET En ro ,orizontal analysis highlights the (eak sol ency position of E#$%&! Working capital appears to (eaken 'ecause current lia'ility is increasing at higher rate than current assets! Like(ise long term3de'ts are increasing (ith higher rate than common e6uity!


"he long term sol ency of FFC is strong5 long term in estments are increasing (ith greater percentage than long term de'ts! ,o(e er5 current lia'ilities are increasing (ith little higher percentage than current assets! Working capital need impro ed5 'ut the long term sol ency is strong!

INCOME STATEMENT En ro :ales re enue has increasing trend5 'ut Engro has not 'een succeeded in controlling its cost including cost of goods as (ell as financial costs! "his trend sho(s a decrease in the operating le erage! #et profit is increasing 'ut (ith smaller rate than net sales!

FFC ;espite of energy crisis and increasing prices of fuel5 ffc has controlled its cost! <oth sales and cost of sales are increasing (ith similar rate! Accompanied (ith it net income is increasing! "his signifies strong profita'ility!

T%END ANA$&SIS EN'%O "here is continuous gro(th in the sales of engro fertilizer! "otal e2penses are also increasing (ith similar rate5 'ut net income is increasing (ith half rate than that of sales gro(th rate! "here may 'e arious reasons for such unusual relation! &ne reason may 'e sales 6uantity is not increasing (ith desired rate5 (hile the sales prices of fertilizer products are raising high to sky! "his trend highlights the higher financial le erage! *olatility of net profit is high5 (hich increases the financial risk specially (hen sales declines!

FFC :ales5 e2penses and net income are increasing (ith similar rate! "his sho(s the efficiency of FFC!

%ATIO ANA$&SIS %A"I& A#AL=:I: FFC +4)4 +4)) +4!08 97!-8 >7!/8 0-!48 .4!78 E#$%& +4)4 .!48 .!/8 ).!)8 ./!48 )9!48 +4)) .!98 /!.8 +4!-8 04!48 +-!48

%eturn on Assets 8 %eturn on Capital 8 %eturn on E6uity 8 $P margin net profit margin )/!/8 /7!-8 7)!.8 .)!.8 +.!08

(rofita)ility* $P margin of 'oth companies e2perience gro(th o er the period of time! ,o(e er5 the #P margin of FFC has significant gro(th from +4)4 to +4)) 'y +.85 (hereas5 #P margin of Engro has slight increase of / 8! "his signifies increase in operating or interest e2penses of Engro! FFC enjoys higher return o er its assets (ith persistent increase5 (hereas Engro appears inefficient in using its assets! FFC is leading in the market 'y pro iding higher return on its e6uity5 as (ell as5 return on capital (ith continuous gro(th ?%&E increases from 7)8 to >78@5 (here as Engro has much lesser return on 'oth e6uity and capital! %A"I& A#AL=:I: FFC +4)4 +4)) 4!>> -!+. ) +.9!44 )0+!.4 + E#$%& +4)4 4!// )!0> .4 +7!49 0!04 .!44 +4)) 4!/. )!07 -. )9!./ 0!+> -!44

o+eratin +erformance
"otal Asset "urno er ?times@ Fi2ed Asset "urno er ?times@ de'tor recei ing days Accounts %ecei a'le "urno er ?times@ In entory "urno er in entory processing time ?days@ O+eratin (erformance* & er all operating performance of FFC as compared to Engro is 'etter 'ecause of the follo(ing: FFC is operating efficiently (ith its assets up to ):) times of total assets turno er and up to -:) times of fi2ed assets turno er! Whereas Engro could ha e a ailed half times than that of FFC! ;e'tor collection period of FFC is ideal in the industry ?one day in +4))@! )!4. +!9+ )./!44 +9+!7> )

%A"I& A#AL=:I: FFC +4)4 +4)) )!47 4!>/ 4!)4 .-!+4 E#$%& +4)4 )!/+ 4!9+) 4!7+ +!>7 +4)) )!.+ 4!.0+ 4!7/ )!>-

li,-i.ity ratios
Current %atio Auick %atio "otal ;e'tBE6uity Interest co er $i,-i.ity an. sol/ency %atios* Comparati ely5 FFC has strong sol ency position! FFC is operating (ith >48 common e6uity and its interest co er ratio is .- times in +4))! Whereas Engro sho(s opposite case5 it is operating (ith 7/8 e2ternal financing and its interest co ering ratio ?)!>- times@ sho(s significant sol ency issue! ,o(e er5 4!90 4!74!+4 )0!44

li6uidity position of 'oth companies is not ery apprecia'le! Comparati ely Engro has 'etter performance in current and 6uick ratios than Engro! %A"I& A#AL=:I: FFC +4)4 +4)) +4 +0!/+ /!0. )0!/) 0 )7!+7 ))!++ 7!9 E#$%& +4)4 0 +4!/4 .!+ 0!9 +4))

Earnin s ratios*
di idend per share ?%:@ earnings per share ?%s@ price earnings ratio di idend yield Earnin s ratios* "he earnings per share ?;P:@ of FFC has increasing trend5 it has reached to +485 as compared to EngroCs 08 stagnant ;P:! ;i idend yield of FFC is increasing to )0!/85 (hereas5 di idend yield of Engro has drop to 0!98! Price earnings ratios of 'oth companies are dropping significantly! CONC$USION In the fertilizer sector of Pakistan there is persistent gro(th of sales and profita'ility! "he t(o giant companies ha e different (ays of financing5 i!e! Engro hea ily is de't3financed and FFC is hea ily common3e6uity financed5 so their sol ency position is different as (ell! "he Engro could not utilize its e2ternal financing efficiently5 (hich has created sol ency issue for it5 its interest co erage is just )!>times of it net income and its de't to e6uity ratio is 7/:+! "he $P margin of 'oth companies is strongly gro(ing5 possi'le reason may 'e increasing in sales prices of their fertilizer products! "he net profit margin and return on e6uity of Engro is lesser than FFC5 possi'ly due to increase in its financial cost! "he return on e6uity ?>7!/8 in +4))@ pro ided 'y FFC is an ideal for potential in estors! "he trends of a erage collection of 'oth companies are ery different possi'ly due to their credit policies ?FFCC collection period is one day5 and engroCs collection period is -. days@! Possi'le reason may 'e that FFC has just )48 credit sales5 (hich has 'een gi en after the 'ank guarantee! Whereas5 Engro has su'stantial credit sales! %ECOMMENDATION )! "he fertilizer sector need to impro e their production to reduce their cost of production5 'ecause rising prices of fertilizer products gi es an in itation to the international competitor5 recent re ie( of industry sho(s significant decline in the sales of domestic player 'ecause the go ernment has imported fertilizer product significantly! +! "he companies should find alternati e energy source to use as ra( material5 'ecause natural gas is supposed to 'e e2hausted! -! "he companies should analyze and implement the most efficient com'ination of capital structure ! FFC has to pay hea y ta2 due to profound e6uity finance5 (hereas engro has to pay large interest due to profound interest payments ))>!09 ).!+.